Decoding India Budget FY 21-22:

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Decoding India Budget FY 21-22:

Budget announced by our FM post pandemic is certainly a landmark budget which has given clarity to many aspects. With huge capital expenditure to privatisation of major government corporations to the beginning of an end of tax free regime for HNIs and many more directions, it attempts towards combating Pandemic effect at the earliest. The road map for New India is clear, Government wants to concentrate on Governance and unlock its wealth to manage the huge deficit which has arisen due to covid 19 pandemic. The government has prioritised growth over fiscal consolidation. The fiscal deficit for FY22E at 6.8% (FY21 RE at 9.5%) and the consolidation path is gradual, with 4.5% fiscal deficit target by FY26, which gives at least a 4 year time window of pro-growth approach.

We are listing below some of the relevant points covered in Budget and decoding the same for your understanding.

Salient Features:

    For 2021-22, the FM proposed a sharp increase in capital expenditure and thus has provided Rs. 5.54 lakh crores, which is 34.5% more than the budget estimate 2020-21.

    The FDI in insurance increased to 74% from 49%.

    In 2021-22 IPO of LIC.

    The Finance Minister proposed that senior citizens (above 75) earning only pension and interest income from deposits would not be required to file Income Tax Return. 

 Dividend payment to REIT/InvIT to be exempted from TDS.

    For ULIPs taken on or after Feb. 1, 2021, the maturity proceeds of policies with an annual premium of more than Rs. 2.5 lakh will be taxable at par with equity-linked mutual fund schemes and will no longer be tax free. This brings parity between ULIPs and equity MFs which serve the same purpose of long term investments.

    Exemption from tax audit limit doubled to Rs.10 crore turnovers for companies doing most of their business through digital modes.

    New centrally sponsored scheme PM Atma Nirbhar Swasth Bharat Yojana to be launched with an outlay of Rs. 64,180 crore over 6 years.

    The government raised the agriculture credit target to Rs. 16.5 lakh crore in 2021-22.

    The definition of small companies to be revised by raising capital base to Rs. 2 crore from current limit of Rs. 50 lakh.

    If you contribute more than Rs. 2.5 lacs to your EPF in a financial year, then the interest earned on the excess amount will be taxed at your slab rate.

    Setting up of a new asset management company to deal with stressed assets.

Decoding

  • The above are some of the highlights which indicate that the regime of tax free returns for HNIs is now heading to end. The government levied capital gain tax of 10% beyond Rs. 1 lakh per annum in 2018 budget for equity and equity MFs and now the ULIP plans which have been enjoying tax efficiency for investors both in term of tax rebate under 80c and also tax free income under section 80 10(10D) has been capped. The government has tweaked the same with any gains from a ULIP policy shall be treated as capital gains in case the premium paid for any year exceeds Rs. 2.5 lakhs. Such policies will now be taxed at 10 per cent at maturity bringing at par with equity MFs. Besides STT or securities transaction tax will also apply when redeeming the ULIP policy. In case investors hold different policies, then an aggregate of the premium shall be considered for deciding the taxation aspect. However, traditional Insurance Plans keep enjoying the status of tax free returns under section 10(10D).

  • The top executives of the corporate sector have been enjoying tax free status by contributing more than the required in EPFO to enjoy tax free income. The new rule lays that an employee contribution to provident fund of above Rs. 2.5 Lakhs in a year, income tax needs to be paid. E.g. If an employee is contributing Rs. 3 Lakhs to provident fund, then they need to pay tax on interest received on incremental Rs. 50K contribution (Rs. 3 Lakhs minus Rs. 2.5 Lakhs exemption).

  • IPO of LIC though has been in news for last one year but recent announcement by government proposing privatisation of few Nationalised banks and Insurance Companies indicate that the government is going all out to monetise its wealth by encashing the profitable ones and privatising the ailing ones so as the government doesn’t need to fund their never ending loses. Insurance Sector with increase in FDI would certainly see many changes and it would help building Forex Reserves. Creation of ARC to house bad loans, setting up of DFI for infra funding, strengthening of the NCLT process will bring robust credit growth.

  • We believe that the budget is laying the foundation to help India move towards a sustainable high growth trajectory in the medium-term. The FIIs and domestic FIs have given thumbs up to the budget which has dealt the economy with all the maturity to try to fulfil the target of 5 trillion as envisaged by our PM by 2024. And as the saying goes “Every Crises Gives an Opportunity” and who knows India benefits largely when World starts to shift production capacities from China.